How Decentralization Is Expanding The Possibilities Of Finance

Finance is a necessary human activity. Money has been the medium of exchange since the neolithic revolution allowed people to specialize in various crafts and trades, ensuring that a person whose job is to create one type of commodity is able to obtain all of the other things required in life. Finance, like fire and electricity, is neither intrinsically good or bad; it is merely a tool that people have used to produce the contemporary world.

Finance, like all other technologies that have been devised and harnessed, is dynamic rather than static. It is particularly vulnerable to technological change. For example, wealth in most pre-modern communities was centered on physical land and the resources it produced. Money, as such, did not become important to the world’s economy until Renaissance Italy, a transition that permitted transformational shifts like double-entry bookkeeping and joint-stock businesses, setting the groundwork for today’s contemporary world.

Today, we are on the verge of another financial revolution, propelled by a single, powerful word: decentralization.

Decentralization has the potential to offer up virtually limitless new options for people’s access to and usage of financial systems. It promises a new paradigm — decentralized finance, or DeFi — that can increase access to critical operations such as banking and credit while decreasing inefficiencies and enhancing security. It has the potential to improve the efficiency, dependability, and accessibility of finance for individuals all around the world by utilizing the underlying power of blockchains.

Expanding access to finance

Lending is one of the most troublesome aspects of the traditional economy. Even in the developed world, many people do not have access to credit or are purposefully denied it. While it may not be top of mind for many people, it is a critical financial necessity; for example, nearly no one on the planet has the financial means to own a home outright.

Borrowing money up front is how people become homeowners and generate wealth through equity. However, many people are denied this basic right; the World Bank estimates that about one-third of the world’s population today lacks access to money.

Inequality is fueled by the world’s traditional, centralized banking systems. Credit rating organizations, for example, make opaque judgements of a person’s “worthiness” to borrow money, refusing individuals without prior ties or paper trails. As a result, those who are wealthy are able to obtain even more money, gain access to more possibilities, and increase the value of their holdings, while those who are impoverished remain trapped.

Another key economic function from which many people around the world are excluded is the ability to save money. Those who do have access to savings accounts are compelled to accept interest rates below inflation on their deposits, despite the fact that this money is what allows banks to produce billions of dollars in revenue through lending.

This paradigm is now being shifted by decentralization. Large decentralized networks of “nodes”: individual computers that collectively validate and immutably record every transaction maintain, expand, and govern smart contract networks. This consensus-based governance removes the need for gatekeepers while also allowing for a more transparent, efficient system with no single point of control or failure.

 

This site uses cookies to offer you a better browsing experience. By browsing this website, you agree to our use of cookies.